ADR/GDR Potential in Central Europe

Abstract

Depositary receipts gained much popularity in the 1990s. After a slowdown in 2001/2002, years 2003 and 2004 brought a renewed progress of the DR markets. Also Central European companies are gradually becoming aware of the advantages of DR offering. In line with the market segmentation hypothesis, we found, that the prices of depositary receipts by Central European companies and their respective actual shares are very closely correlated and the opportunity of arbitrage is therefore very limited. To quantify the effects of a DR issue on the respective actual shares in the local market, we considered 19 shares of companies from the Czech Republic, Hungary and Poland, which issued depositary receipts. The results show that creation of a DR program may have a positive impact on the respective actual shares’ value. The simple average of value added to the share price one year after establishment of the DR program reached very high, positive value; the price increase (from the level of the day 20 prior to the issue) equaled 33.33%. On the other hand, with 7 out of 19 shares no positive effect of DR offering on price could be observed. On the same sample, the hypothesis, that a DR listing enhances liquidity of the respective actual shares in the local market, was confirmed. The daily trading volumes improved on average by 21% in the year subsequent to the listing.Depositary Receipts; cross-listing; Central European stocks; market integration; stock performance; liquidity effects